Valuation of Synthetic Equity

The term synthetic equity is a catch-all term for a variety of economic interests in a company that don’t also include the legal ownership of an equity interest. For anything that is labeled synthetic equity, the potential economic claim/benefit granted to the holder uses the Company’s stock price to determine the economic return, but the economic return is paid in cash instead of shares. Accordingly, the payments may dilute (i.e. reduce) value of the business because cash leaves the Company, but they don’t dilute percentage ownership because no additional shares are issued.